A Standford University finance and economics professor has launched a scathing critique of the banking sector, believing that lack of reform has left Australian banks vulnerable to collapse.
Anat Admati told Trading Day that the misbehaviour of banks around the world has quite rightly left the sector’s reputation in disarray.
“You just have to read the papers to find out this is going on all over the place. Danske, ING, Deutsche, Wells Fargo… most of the big banks in the world, and sometimes small banks, have been involved in all kinds of [law evasion],” Anat Admati said.
From money laundering, liar loans (loans that were issued with little or no proof of income required), bad advice, and rigged interest rates, Admati said banks have had opportunities to indulge in all sorts of wrongdoing for one simple reason.
“Crime pays in that context, it’s profitable,” she concluded.
What’s more though, is that despite the devastation that the global financial crisis (GFC) unleashed around the world, Admati admitted that efforts to overhaul the banking system have failed.
“These reforms have done very little, it’s all very complicated but the bottom line is they haven’t changed much of the incentives, [or] much of the culture of these banks,” she said.
Those sentiments echo much of what was heard here in Australia during the wake of the royal commission public hearings, and with Commissioner Kenneth Hayne to hand down his final report in February, there seems plenty to be concerned about.
“In Australia, you have four big banks with very little competition, they’re too big to fail, they fund themselves in a very fragile way, you have a lot of household debt, huge mortgages, high and falling house prices, [and] a lot of these things are getting people worried,” she explained.
With Australian banks holding “outrageously inadequate” capital relative to their debt, Admati said they are ill-equipped to deal with any financial crisis, such as a housing market collapse.
At the same time, Australian banking executives were being incentivised to take on huge risks in order to secure million dollar paydays.
“The bankers are compensated in a way that… they are paid to gamble,” she said. “The way they can structure the risk, there will be a lot of returns up-front and therefore a lot of high bonuses which are not ever clawed back when things turn out badly.”
In order to prevent Australian banks treading the same path of American enterprises like Fannie Mae and Freddie Mac, which were bailed out by tax-payer dollars during the GFC, Admati said drastic measures would need to be taken.
“Right now I would stop every penny of dividend and payouts from any bank that is even nearly too big to fail. If they are going to cause harm or need bailouts, they should do anything but take the money out,” she explained.
“I would pay salaries with, instead of cash, newly issued equity. So, anything to not deplete the cash.”
While Australia may have avoided the global financial crisis relatively scar-free, urgent reforms are required, Admati claims, if we are to avoid the next one.
Watch the full interview above.